Pennsylvania Real Estate Investment Trust (PEI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust third-quarter 2012 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is also being recorded today, Wednesday, October 24 of 2012. I would now like to turn the conference over to our host for today, Ms. Heather Crowell. Please go ahead, ma'am.

Good morning and welcome to PREIT's third-quarter 2012 conference call. During this call PREIT will make certain forward-looking statements within the meaning of the Federal Securities laws. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are subject to risks and uncertainties that may affect future events or results. Descriptions of these risks are set forth in the Company's SEC filings.

Statements that PREIT makes today might be accurate only as of today, October 24, 2012, and PREIT makes no undertaking to update any such statements. Also, certain non-GAAP measures will be discussed. PREIT has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC. It is now my pleasure to turn the call over to Joe Coradino, CEO of PREIT.

Thanks, Heather. Welcome to the Pennsylvania Real Estate Investment Trust's third-quarter 2012 earnings call. Joining me on the call today is our CFO, Bob McCadden.

We have established a clear plan with stated objectives and measurable goals, setting a determined path for moving forward that requires us to improve our balance sheet and achieve operational excellence in the interest of growing the Company's platform in the future.

As discussed with you previously, our near-term goals are to achieve bank leverage below 60%, comp store sales above $400 per square foot, non-anchor occupancy over 90%, gross renewal spreads greater than 3% and growth in same store NOI in excess of 2%.

In pursuit of balance sheet improvement we have reduced leverage and average interest rates and have extended the average length of our debt maturities. In addition, we have increased our liquidity and have released two malls from our credit facility collateral pool.

As Bob will discuss in greater detail, during the quarter we completed financings for a diverse group of properties, Cherry Hill Mall, Cumberland Mall and Christiana Center. As a result of the success of the Cherry Hill Mall redevelopment and the substantial value creation we were able to secure a $300 million 3.9% mortgage on this property.

After the close of the quarter we executed a second preferred share offering for the year bringing our pro forma bank leverage as of September 30 to just under 62%. This is significant progress from the nearly 67% where we began the year and toward our previously stated near-term goal of below 60%.

As another step toward delevering we are negotiating the sale of two wholly owned power centers, Paxton Towne Center and Christiana Center. The bidding process was robust yielding competitive market pricing. Upon closing we expect that these transactions will result in a meaningful reduction of debt.

The marketing of the Commons at Magnolia continues. On the operations side we are making progress toward our previously stated goals of a driving increases in sales, NOI and occupancy and improving the quality of our portfolio. We had another consecutive quarter of sales growth, improvement in overall occupancy to 92.9% and a noteworthy improvement in our gross renewal spreads to 4.3%.

We are taking a multi-pronged approach to improving the metrics of our core portfolio. First, as you all know, we are looking to dispose of some of our non-core mall properties which will improve our overall portfolio operating metrics and our leasing leverage with national tenants.

We are under contract to sell Orlando Fashion Square. The buyer has posted a non-refundable deposit, is currently underway with efforts to secure financing and we are working toward a closing prior to year end. We are also in discussions with several prospective buyers for Phillipsburg, North Hanover and Chambersburg Malls.

Second, we are underway with re-merchandising efforts at a core group of assets that we believe have the greatest potential for near-term growth guided by a prudent approach to capital allocation and investment returns.

During the quarter we signed our first restaurant lease for Moorestown Mall with Iron Chef Marc Vetri to open Osteria, named one of the 101 best places to eat in the world by Newsweek.

Mercy Health System opened a 20,000 square foot ambulatory facility at Plymouth Meeting Mall representing our first major tenant added as part of our strategic healthcare leasing initiative.

After the close of the quarter new J.C. Penney stores opened at Willow Grove Park and North Hanover Mall and Forever 21 opened a large format store in the former Borders Books location at Patrick Henry Mall.

We also executed a lease for American Eagles Outfitters' return to Plymouth Meeting Mall, which we believe will be a catalyst to re-tenant the mall interior.

In addition to our attention on near-term goals we are also focused on the Company's growth. Along these lines we are pursuing a number of organic growth opportunities.

You may have read that we are in discussions to acquire a property integral to the Gallery at Market East in downtown Philadelphia. We have an opportunity to expand our interest in the property we believe that a measured approach -- with a measured approach we can create value. The overall Gallery project is in the formative stages and requires cooperation from many different entities including the City of Philadelphia and others in the public financing arena.

Our results during the quarter were consistent with our expectations. Recent separation caused in the balance sheet improvements are impacting our earnings which Bob will talk a little bit more about. We view many of these items of temporary but necessary in the name of progress.

So in summary, we are focused and determined to execute our plan and have made progress on our balance sheet through refinancings, preferred offerings and power center dispositions. On the operational front we are growing occupancy, sales and renewal rents and are also making progress on the sale of our non-core properties and we remain myopically focused on the execution of our strategic objectives.

We anticipate healthy holiday sales growth, consistent with NRF and ICSC projections. And with that I will turn the call over to Bob McCadden.

Thanks, Joe. FFO as adjusted to exclude the provision for employee separation expenses was $25.1 million or $0.43 per diluted share for the quarter ended September 30, 2012, reflecting a diluted impact of the Series A preferred share dividends. This compares to $29 million or $0.51 per diluted share for last year's quarter which included a $1.5 million bankruptcy settlement and higher margins from redistributed utilities based on then higher tariffs.

Same store NOI excluding lease termination revenue for the quarter ended September 30, 2012 was $67.7 million compared to $68.4 million for last year's quarter. Lease termination revenue for the quarters ended September 30, 2012 and 2011 was $300,000 and $200,000 respectively.

Results for the quarter were impacted by lower margins on redistributed utilities which accounted for approximately $400,000 of the difference from last year. We were impacted by a 3% decrease in electric usage by our tenants.

While our costs of procuring electricity was down by 3% per kilowatt hour, the redistribution rates we're permitted to charge our tenants were lower on average by almost 17% in the 2012 period as compared to the 2011 period.

We are experiencing a separate temporary reduction in occupancy and revenues at Moorestown Mall which is being impacted by the store closings, construction of the new theater and other factors related to the redevelopment in the current quarter which accounted for an additional $400,000 of the change in the NOI.

We also had a $300,000 decline in operating margins at the non-core mall properties being offered for sale, principally Phillipsburg Mall. Same-store NOI for the core mall properties including Moorestown was up by 3/10 of 1% for the quarter on higher occupancy.

Interest expense for the quarter was $33.9 million or 2.3% lower than last year's quarter. This improvement reflects lower average borrowings and slightly higher average rates reflecting a one-year step up swap on $200 million of floating rate debt that went into effect in April of 2012. The step-up swap entered into in 2010 expires in March of 2013. The negative impact of the swap was partially mitigated by lower interest rates from the 2012 financings.

Average borrowings were $111 million lower than last year's quarter and the effective interest rate on all of our borrowings during the quarter increased by 8 basis points to 6.06%. Total occupancy at the end of the quarter was 92.9%, an increase of 100 basis points over the same period last year. Non-anchor occupancy increased 130 basis points from the 87.8% to 89.1%.

On the leasing front we executed 195,000 square feet of new transactions and 461,000 square feet of renewable transactions. For these renewals we generated an increase in base rents of 3.9% compared to expiring rents and 4.3% on a gross rent basis. Year to date we have generated increases in base rents upon renewal of 3.9% which compares favorably to the 1% spread for the same period last year and we have completed 48% more non-anchor renewal transactions.

In addition, we have executed leases for 710,000 square feet at an average base rent of $25.77 per square foot for the first nine months of the year compared to 684,000 square feet at an average base rent of $18.24 per square foot in the same period in 2011.

Comp store sales continue to improve and were $379 per square foot at the end of the quarter. We now have six properties reporting sales over $400 per square foot and are particularly pleased with the continued growth at our Cherry Hill Mall, which now boasts sales of over $639 per square foot. If you exclude the non-operating -- or the non-core mall properties, sales per square foot averaged $389.

Outstanding debt at the end of the third quarter, including our share of partnership debt, was $2.28 billion, a decrease of $102 million from September 30 of 2011.

As Joe mentioned, we have been very active on the capital markets front. During the quarter we refinanced three mortgage loans for $402 million at an average interest rate of 4.06% generating excess proceeds of approximately $85 million before closing costs and lowering the average interest rate by 124 basis points.

Year to date we have completed $496 million of property level financings generating net proceeds of approximately $103 million and a reduction in average interest rates of 129 basis points to 4.25%. Following these financings the Company's weighted average maturity for its mortgage loans increased to 5.4 years from 3.4 years as of December 31, 2011. We have no remaining mortgage debt maturities until June of next year.

In October we executed our second preferred share offering this year closing on an issuance of 3.4 million shares at 7-3/8% generating net proceeds of approximately $83 million. We used $15 million of the proceeds to repay the full amount outstanding under the revolving facility and $58 million to permanently reduce borrowings under the 2010 term loan. In connection with this repayment we released Wiregrass and Crossroads Mall from the credit facility collateral pool.

In the fourth quarter we will accelerate the amortization of $700,000 of non-cash deferred financing costs related to the permanent pay down of the term loan. Immediately after that repayment there was no balance outstanding under the revolving facility and $182 million outstanding under the 2010 term loan. Following this and the April offering we now have a total of $201 million of preferred equity outstanding at a blended rate of 7-7/8.

Turning to guidance, we are adjusting our estimate of net loss per diluted share and FFO per diluted share for 2012 to give effect to the October 2012 issuance of Series B preferred shares and related accelerated amortization of non-cash deferred financing costs resulting from the permanent reduction of the 2000 term loan and other factors.

Our estimated net loss per diluted share ranges from a loss of $0.75 to $0.70 per share and FFO as adjusted is now estimated to be $1.82 to $1.87 per diluted share.

Our fourth quarter performance will obviously be impacted by the strength of holiday sales; weather related expenses and tenant credit worthiness. In last year's fourth quarter our bad debt expense was de minimis and we benefited from lower than average weather related CAM expenses. With that we will open it up for questions.

(Operator Instructions). Craig Schmidt, Bank of America.

I wanted to focus a little on the Plymouth Meeting Mall. It seems like in the last couple years you have been able to grow the sales per square foot, but the average rents continue to trend down. It looks in 3Q 2009 you had average rents of $34.52, then it dropped to $31.75, $29.04 and then this year $28.17. What do you think the future trend of those average rents are going to be and what is kind of driving these average rents down?

Well, I think -- well, first of all I think it's good news that American Eagle is coming back to Plymouth Meeting Mall, which is -- they left in I believe it was 2008. In any event -- and our whole strategy around Plymouth Meeting Mall was to populate the exterior of the mall with the restaurants, Whole Foods, et cetera, in the hopes of growing interior space.

The property is -- it is a highly competitive environment, 10 miles from King of Prussia Mall, not too far from Walnut Grove. We have had to put a number of tenants in the interior of the mall on I would say deals that were not as favorable as we would have liked.

However, I think the future in the transactions that we have in the pipeline are more favorable and we are beginning to take the mall in the direction that we anticipated taking it to. It used to be a property that used to keep us up nights; it is not keeping us up nights as much anymore. There is a healthy pipeline of transactions.

What are you targeting say over the next couple years the interior space to be leased -- occupied at?

You mean in terms of percentage occupancy?

Yes.

I mean clearly we think we can get Plymouth Meeting mall into the mid-90s. And we think in the near term we could achieve something in the -- approximately at 90%, that is our goal.

And where do you think occupancy costs could be as a percent of sale?

I don't have that number at my fingertips right now.

Well, Craig, I think we expect to be able to drive our occupancy cost to at least the portfolio average.

Okay. Because right now it's showing 8%.

Right, so we would expect to get into the 11%, 12% range.

Okay, thanks a lot.

Michael Mueller, JPMorgan.

A couple of questions. First of all, Joe, I guess going back to the leverage, what we talked about having leverage below 60%. Are you including preferred as equity in that calculation or are you including that as leverage?

When I talk about leverage I'm talking about bank leverage. And so the preferred equity is not in that number.

Okay. So you're just -- so it's debt, debt below 60%, just debt, okay.

That's correct.

And then kind of going to the asset sales, you went through and you talked about a lot of properties. Is it possible to, as best as you can at this point, maybe put some sort of a -- group them all together, some sort of a rough time frame there?

Because I think you said, Orlando Fashion Square may be before year end, negotiating on Paxton and Christiana. Could that be a 2012 -- could those be 2012 events as well? Does it feel like they're 2013? The other stuff where there are discussions. So anything you can do for like a rough time frame, a little bit more would be great.

And then, is there a way to bigger picture, if you lump all this stuff together what is the potential magnitude dollars -- if everything hit, I mean what is a rough dollar amount that this could be, just even a wide range and then thinking net proceeds?

So, you asked a couple questions there. With respect to the timing, when we -- as I said on the call, we are anticipating a closing on Orlando prior to year end. I think the power centers probably either fourth quarter or first quarter next year. We obviously can't guarantee that; we are in negotiations.

With respect to a magnitude, that is something -- look, we are in pretty sensitive stages of negotiations at this point and any information I gave you wouldn't be constructive to getting the deals done. So I would prefer -- you guys will be the first to know when we have the money in hand. It is not over it until the ink is dry and you have the money.

Okay. Okay, thank you.

But understand, I mean this is a primary focus of ours right now. We've got an internal team who is working on nothing else other than disposing of the power centers and the non-core mall assets, they're making progress, they are in discussions and we talk about it every day.

Got it. Okay, thank you.

Ben Yang, Evercore Partners.

Just going back to the earlier question on rent. Maybe more broadly, I totally understand the line between sales and rent, but also surprising to see the sales trends up for three years and your average rents overall continuing to fall.

Is there something going on in your market -- maybe stronger competition, changing demographic -- that would suggest that maybe there's a little embedded rent growth in the portfolio despite the higher sales that you guys have achieved?

Yes, there's a couple of things going on. I think we have been -- as we have converted -- I will call it a number of different factors. First of all, as you would imagine that as you move your occupancy up at any level as we increase occupancy you are leasing on average less desirable space at a shopping center. So by definition the space that you are leasing it's going to be less valuable than the portfolio average.

Likewise, when you see decreases in occupancy typically the spaces that are vacant first are those that are on the side corridors and up against the anchor. So there is a natural average dilution that takes place as occupancy increases.

Secondly, as you know, we have talked about this during the 2004 to 2010 period as we were undergoing re-developments we were doing a lot of gross deals, percentage of sales deals. And as we convert some of those back to net rent payers the base rent is actually flat or declining because now we are able to charge some extras along with that.

So one of the things we will likely do is begin reporting our rents on a gross basis either the end of this year or the first quarter next year. We think that is a more meaningful metric than base rents which sometimes (multiple speakers) what's actually happening in the portfolio.

Let me add to that. Hi, Ben, this is Joe. I would add to that that there is -- our occupancy cost, it is now at about 11.4%. We see that as an area of opportunity, to respond further to your question. We brought in a new leasing person, a 17 year veteran from Simon; we brought in a former VP from Vornado and a new head of partnership marketing from Westfield. I mean, so we have got some fresh new talent in here and we think we can see that as an opportunity for us and move it in a positive direction.

I mean, I guess it is still surprising to see some of your malls, the average rent in the entire mall get marked down so quickly, down 6%, 7%, 15%. I mean is that solely attributable to what you talked about, just the last bit of occupancy garnering that lower rent or is there something else kind of unusual going on? I mean it just seems so large and so fast that rent to decline so -- by that amount.

We did have a focus in the last few years during the economic downturn of pushing the occupancy at the expense of rents. But clearly I think that focus has changed because there is little leverage that you can have when you are at a 75% occupancy level. As you start to move that past -- through 80% to 85%, closer to 90% it gives us a little bit more leeway to push rents. But while you are sitting there with a quarter of your mall vacant in some cases it is awfully hard to attract that next tenant without making some economic concessions.

But would you say that is the environment is getting better where you are getting a little more clout as you are negotiating new leases in some of these malls?

I think it is reflected in our renewal spreads. If you (multiple speakers) over the last six or eight quarters you will see -- we were probably generating renewal spreads double-digit negatives and now we are in the positive territory, and we have been there for some period of time.

Okay, fair enough. And did you give a cap rate for Orlando Fashion, the one that you are going to sell or are you still negotiating that one?

We're really not in a position to talk about a cap rate at this point.

Okay, but you guys will tell us when that thing gets sold?

Yes, we well.

(Inaudible). Okay, great, thank you.

(Operator Instructions). Quentin Velleley, Citigroup.

Just in terms of -- I just want to talk a little bit about NOI growth. And obviously you have good retail sales growth and a good increase in occupancy but it hasn't yet been reflected in same-store NOI. And I guess that goes to some of the comments you made about the electricity recoveries and also some of the expense increases.

How should we be thinking about operating expenses and the recovery rate going forward? Should we see an improved recovery rate and some improvement in operating expenses that should drive some better NOI growth? Or is there still a little bit of risk there?

Well, a large part of our operating expenses are (technical difficulty) controllable and non-controllable. I think what you are seeing reflected in the quarterly performance, yes, I think we benefited, as we talked about last year, from the one-time increase in utility rates for some of our Pennsylvania properties.

To some extent now that we are working in de-regulated environments you may see a little bit more volatility from some of those line items. So we are buying electricity on the open market, typically buying it ahead of -- on a forward basis. But the utility commissions in each state basically set rates at their whim. So sometimes we may either be advance of that or some other periods lag that. So you are going to see I think again more volatility on the utility redistribution income line.

Also, early part of this year -- at the end of the fourth quarter of last year we had the benefit of relatively mild weather, which reduced the amount of snow removal costs and drove down our common area electric usage as well. So again, those are not controllables that we are really at the mercy of mother nature, if you will.

And with respect to the controllables, we have entered into long-term outsourcing contracts with our maintenance and security providers and typically provide for an equivalent of a cost of living increase in the annual contract amounts. So those are generally pretty predictable and we know what they are going to be a year or two in advance. It's really the non-controllables that create the volatility in our quarterly NOI and quarterly expenses.

Okay. And then just in terms of each market, I think you re-leased some of the [Sturbridge's] space. Could you just talk about what the opportunity is with the other space? Or is re-leasing that really contingent on whether or not you buy the adjoining property and what your redevelopment plans might be?

Actually, yes, we did reach and retain a significant portion of the Sturbridge's building with both the state of Pennsylvania and the Philadelphia newspaper -- Philadelphia Inquirer and Daily News. So currently you have Concourse 1 and 2 available, three floors of the holding available. And we are actively in a leasing effort for that.

That building can be leased irrespective of whether or not the redevelopment of the balance of the Gallery takes place or the acquisition of the 907 Market building occurs. So we are moving forward. That will be a highlight of our trip to New York; we will be focused on leasing that. We have a number of prospects.

Okay. And then just with asset and whether or not you buy the adjoining property, how should we think about the timing of the deal? Could you maybe just talk a little bit about who else has interest in the project and ultimately how much capital you might be spending on it, assuming you do go forward with an acquisition and a redevelopment?

Are you talking about interest from a tenant perspective?

Well, it sounded like there is local government interest and from a --?

Okay, so if you think about the Gallery you have to think about two things. One is it is going to require significant public financing, which is a work in progress, right, and a number of government concessions that need to occur that we are working on. So with respect to the timing of it, it would be difficult to predict at this point given the slowness of the government decision-making process, number one.

Number two, with respect to the cost, same because the scope and scale of the project is going to be driven to a great extent by the amount of public financing that we end up getting. We will design a project based on how much public financing we get. But if you want to get some real color on this, by the way, come to our Investor Day -- that is a commercial -- November 8.

Okay. We will all look forward to that. And just the last question from me, the Ascena Retail Group which I guess is your Justice -- a lot of your Justice stores. The number of locations under percentage rent deals -- it looked like it went up, it doubled but the square footage stayed the same. I'm not sure if was just a difference in classification of your store count or something there?

I don't think anything happened.

It must just be a difference in the supplemental. But that is okay.

Yes, they acquired Dress Barn, right? They acquired Dress Barn in the last -- in the last couple of quarters. That is probably the inclusion of the Dress Barn locations into the portfolio.

Right. The number of locations went up but it looked like the GLA didn't, but maybe it is just a classification issue.

Okay, we will double check that. Again, if there is more time we will get back to you.

Thank you.

Thank you. And I am showing no additional questions in the queue at this time. I'll now turn the call back over to Joe Coradino for any closing remarks. Please go ahead.

Well, thank you, everyone. And as a reminder, we do have an Investor Day coming up on November 8 where we will go into more detail on our strategic objectives and plans for the future. We hope you will all be able to join us for this event. If you need additional information please feel free to contact Heather Crowell in our Investor Relations Department. So thank you very much for participating on the call and have a great day.

Ladies and gentlemen, that does conclude our conference for today. Thank you again for your participation and you may now disconnect.